A full-blown sovereign bail-out of Spain would be economically and politically
impossible and cost up to €650bn (£510bn), an in-depth study has warned.

Leading think-tank Open Europe made the estimate based on the assumption the Spanish government would be forced out of the markets for three years because of its unsustainable borrowing costs, as happened in Greece, Ireland and Portugal.

Between now and mid-2015, Spain has funding needs of €542bn, with its banks requiring up to €100bn on top of this. The Spanish regions possibly require another €20bn, according to the study.

A Greek-style bail-out for Spain would bleed dry the eurozone’s €500bn rescue fund, making an alternative solution essential.

Fears that Spain will need a sovereign bail-out mounted last week after the government’s borrowing costs hit fresh highs and Catalonia followed Murcia and Valencia as a region which may be forced to turn to Madrid for assistance to meet its debt obligations.

“The regions will not make or break Spain financially, but their bail-out requests show how politically difficult it will be for Spain to rein in spending and reform,” said Raoul Ruparel, head of economic research at Open Europe.

“The current bank rescue plan is clearly insufficient, while a full bail-out – which could be in the region of €650bn – is impossible.”

Open Europe said the most likely scenario would involve a loan of around €155bn and more liquidity provision from the European Central Bank in Frankfurt.

“However, even that could, at best, only buy Spain six months to a year,” said Mr Ruparel.

Writing in The Sunday Telegraph, the chairman of Goldman Sachs Asset Management and one of the world’s leading economists, Jim O’Neill, said the power to resolve Spain’s problems rests with Germany and the ECB. “The solution lies beyond Spain and partly in Brussels, but probably much more in Frankfurt and also Berlin,” he said.

Mr O’Neill said that Germany and the central bank must decide whether they want the eurozone to stay as one or break up.

If Germany will not agree to pooling the region’s debt through the creation of eurobonds, perhaps “they should stop the project now”, he argued.

The ECB must be prepared to do more and come up with a vision for the future of the region, he warned.

“The ECB has to start asking itself more searching questions, and soon. How can it be an effective central bank if it can’t influence overall financial conditions in the euro area? The ECB needs to introduce new ideas.”

Open Europe said that seven of Spain’s 17 regions have “unattainable” deficit reduction targets this year, as they are expected to achieve cuts worth more than 2.5pc of their gross domestic product.

The think tank said Britain might come under pressure to contribute to a Spanish bail-out because of the extent of UK bank exposure to Spain. “UK banking sector exposure to Spain totals €70bn – the fifth highest in the EU – while Spanish bank exposure to the UK stands at €343bn.

“In all likelihood, the case for a direct UK contribution to the Spanish bail-out will fall on deaf ears – and rightly so,” Mr Ruparel said.

The Bank of England’s Monetary Policy Committee is expected to leave interest rates on hold at 0.5pc and quantitative easing unchanged at £375bn when it makes its monthly decision on Thursday, despite the news this week that Britain remained in recession with a shock 0.7pc fall in GDP in the second quarter.

Economists said further monetary easing was more likely in November, once the latest £50bn round of QE had been completed.